Reblog: Why Everyone Is a Value Investor
Mention value investing and the phrase brings up different connotations for different people.
Some investors see value as a style as a dead regime, something stuffy old investors like Warren Buffett (Trades, Portfolio) live by, and their devout following of the strategy has cost them big time as they have missed out on some of the market’s best opportunities.
On the other hand, you have the devout value investors, those who remain fully committed to the strategy initially set out by Benjamin Graham and his partner David Dodd, all those years ago, even though this strategy has generated relatively lackluster returns over the past decade.
I fall into neither of these camps. I understand the logic behind value investing but acknowledge that the investment world has changed dramatically since Benjamin Graham was around. Still, I also believe that every investor should be a value investor at heart, for three key reasons.
The value mentality
1. First, there is much more to value investing than just buying cheap securities.
One of the core messages Benjamin Graham tried to get across to his students was the fact that when you invest, you are buying a certain percentage of a business and you should view your stock holding as such, not as a poker chip in a game.
This perspective fundamentally changes the way you can think about investing. Rather than trying to make as much money as fast as possible, following this advice will lead you to high-quality businesses, businesses that are growing and you feel comfortable owning, meaning it’s less likely you will sell the shares when the going gets tough.
2. Another core message Graham tried to get across is that every investor should have a keen focus on risk. Graham developed a strategy with a Great Depression mentality. After nearly losing everything in the 1929 crash, he wanted to make sure that he would never be in this position again, so buying cheap stocks was the obvious solution.
The way he saw it, cash-rich, asset-rich businesses trading at a discount to net asset value were unlikely to go out of business, helping investors avoid a permanent loss of capital. The investment world has changed significantly since 1929, but the desire to prevent a permanent capital impairment should continue to be at the forefront of every investor’s mind — even in growth investing.
3. Every investor should have a keen focus on risk, and they should also seek to invest with a wide margin of safety. This is the third and final lesson from value investing that all investors should employ.
Benjamin Graham first proposed the “margin of safety” principle, and it’s as relevant today as it has ever been, for investors of all disciplines. Investing is a game probabilities, and the margin of safety idea helps skew the risks in your favor.
In this uncertain world, we can never be 100% accurate in our predictions, so the margin of safety offers a cushion against mistakes helping to balance risk and reward effectively.
Everyone is a value investor
These three principles are generally associated with value investing, but every investor should follow them. Buying stocks with a low risk of total loss at attractive valuations is every investor’s primary goal. Few investors set out to buy stocks with a high risk of complete failure, low potential reward and high valuation.
With this being the case, it is easy to conclude that every investor is a value investor to some degree — you don’t have to own value stocks to follow the same mentality.
Indeed, even Graham himself wasn’t a pure value investor. When he came up with the Graham number towards the end of his career, he was willing to accept stocks trading at a P/E of up to 15, a multiple that is considered high even today.
Value investing is much more than valuation alone; it is a mentality every investor can benefit from in one way or another.
The original article is authored by Rupert Hargreaves, appears on gurufocus.com and is available here.